Living Economics

Since people are risk-averse with respect to gain and risk-seeking with respect to loss, their choices can be easily manipulated by whether an offer is framed as a gain or a loss.

Suppose a rare disease would claim 600 lives if we did nothing. We are asked to choose between different policy options:

A. 200 lives could be saved with certainty.

B. 600 lives could be saved with 1/3 chance and 0 lives saved with 2/3 chance.

Typically, 72% of us would choose option A even though the expected value1 of option B is equivalent to option A.

But if the policy options are as follows:

C. 400 people would die with certainty.

D. No one would die with 1/3 chance and 600 would die with 2/3 chance.

Typically, 78% of us would choose option D even though the expected value of option D is equivalent to option C.

Substantively, options A and C are identical and options B and D are identical. It is a case of whether we are viewing the glass as half empty or half full. In the first instance, “lives saved” is framed as a gain. People are instinctively risk averse2 with respect to gain and are reluctant to gamble with a sure gain unless the risky gain is so much higher. In the second instance, “certain death” is framed as a loss. People are instinctively risk seeking3 with respect to loss and are willing to gamble to reduce loss unless the risky loss is so much larger.

If people’s perceptions of reality changes depending how reality is framed, the whole ideological foundation of consumer sovereignty and market exchanges as a positive-sum game is threatened. Then whoever wields the power to frame perceptions would gain at the expense of the passive perceivers. In the marketplace, this means consumers may be stuck with things they don’t really need at higher prices than they should. And in the political sphere, they may be duped into accepting policies that don’t serve their interests.

Note:

The expected value of a gamble is the average value of the payoffs weighted by their probabilities.

The expected value of a gamble is the average value of the payoffs weighted by their probabilities.

The tendency to choose a sure gain over a gamble with equal expected value.

The tendency to choose a sure gain over a gamble with equal expected value.

The tendency to choose a gamble with an expected value equal to a sure loss.

The tendency to choose a gamble with an expected value equal to a sure loss.